Category Archives: Licensing

Two shades of grey: final version of EU TTBER is published

mailShortly before 5 pm yesterday, as IP Draughts was dreaming of the weekend ahead, an email popped into his inbox from the Law Society’s ever-helpful European Office. It alerted him to the publication of the final version of the EU Technology Transfer Block Exemption Regulation (TTBER), which will come into force on 1 May 2014. The final, substantive text, together with an updated version of the European Commission’s (EC’s) Guidelines on Technology Transfer Agreements, can be found here, though it seems they have not yet been published in the Official Journal.

See also the EC’s press release, and their Memo (also described as FAQs) document; the latter provides a slightly more detailed summary of the changes.

In essence, the documents are changed very little from the drafts that the EC circulated over a year ago.  The EC apparently received 56 responses to their consultation on the first drafts, a majority of which seemed to dislike the EC’s proposed changes to the 2004 TTBER. IP Draughts led the team that commented on the earlier drafts on behalf of both the Law Society of England and Wales and the Intellectual Property Lawyers Association. We certainly disliked the changes, and argued for a more liberal regime generally. A copy of that submission appears on the EC’s website here. This blog has discussed the drafts in brief, eg here.

For practical purposes, the main changes to the TTBER, in both the first and final drafts, are in Article 5, headed “excluded restrictions”, but which IP Draughts prefers to call the “grey list”.

Emeritus Professor Valentine Korah of UCL Faculty of Laws

Emeritus Professor Val Korah of UCL Faculty of Laws

First, some background. In previous TTBERs, the “hardcore restrictions” in Article 4 were known as “black-listed clauses”, and following this colour theme, Article 5 restrictions were known as the “grey-listed clauses”. Certainly, (now Emeritus) Professor Val Korah referred to them by this name when she taught competition law to IP Draughts in the 1980s. Including a hardcore/black-listed clause in your agreement brings the entire agreement outside the safe harbour of the TTBER and is very likely to result in a breach of Article 101 of the TFEU.

By contrast, including an excluded/grey-listed clause merely means that you have a clause that is not within the safe harbour, but the rest of the agreement may be within the safe harbour. The EC is suspicious of grey-listed clauses, but not to such a great extent as in the case of black-listed clauses. It is up to you to justify the inclusion of the grey-listed clause to the court, if this issue arises in litigation. In summary, it is a very high risk strategy to include a black-listed clause, and a lower risk strategy (but still risky) to include a grey-listed clause.

Two changes have been made to the grey list in the 2014 TTBER:

  1. Licensee improvements. Article 5 grey-lists an obligation on the licensee to assign or exclusively license back to the licensor any improvements made by the licensee to the licensed technology. Under the 2004 TTBER and its predecessors, this applied only to “severable” improvements, ie those which could be used without infringing the original, licensed technology. The EC has now abandoned the distinction between severable and non-severable improvements, and grey-lists  assignments and exclusive licences of all licensee improvements.
  2. No-challenge clauses. Article 5 also grey-lists an obligation on the licensee not to challenge the validity of the licensed IP. Under the 2004 TTBER and all its predecessors, Article 5 went on to explain that a clause allowing the licensor to terminate the licence agreement if the licensee did  mount such a challenge was not grey-listed. By implication, therefore, a clause allowing termination was within the TTBER, and in practice many, or most, licence agreements that IP Draughts has seen include such a right of termination. However, under the 2014 TTBER this “right” to terminate is limited to exclusive licence agreements.

glass half fullThe first draft of the 2014 TTBER would have deleted all reference to a right of termination but in the final text the EC has reinstated the right for exclusive licences only. So (if taking a “glass half full” approach) one could say that progress has been made during the consultation process. As the EC has noted in its summary of responses, some commenters (including the Law Society) objected strongly to the notion that a licensor could be prevented from terminating the licence of a party that was challenging the licensed IP.  This would lock a licensor into an agreement with its enemy in litigation, and would be a disincentive to licensing. During the consultation process, IP Draughts made comments to this effect in a public meeting at which EC representatives were present, but he felt those representatives were unsympathetic in their response.

The EC has explained its change of heart in the following terms:

In light of the second consultation, the TTBER will continue to cover termination clauses in exclusive agreements when the relevant market share thresholds are not exceeded. In case of exclusive licensing the licensee generally has no incentive to have the IPR declared invalid, but may in particular use the threat of a challenge to put pressure on a smaller innovating licensor. Automatically exempting termination clauses only in cases of exclusive licensing will lead to a proper balance between, on the one hand preserving incentives to innovate and license out, and on the other ensuring that invalid IPR are removed as a barrier to innovation and economic activity. This will in particular support SME innovators to license out their technology on an exclusive basis, without creating a situation of dependence towards their exclusive licensees.

These comments seem to echo some points that were made in the Law Society’s comments on this issue, including:

The change would particularly prejudice SMEs who are licensors, as they are least able to defend an attack on their patent portfolio by a large licensee.

There are a few other changes in the 2014 TTBER over the 2004 TTBER, including:

  • passive sales: the list of hardcore clauses previously made an exception (ie allowed) for certain restrictions on passive sales into another licensee’s [EU] territory for a limited, 2-year period. This exception has now been removed. In IP Draughts’ experience, this was rarely an issue in negotiations, so the effect of this change is probably minimal.
  • software licensing: Recital (7) states that the TTBER does not apply to agreements for the “mere reproduction and distribution of software copyright protected products as such agreements …are more akin to distribution agreements”. In other words, these agreements should be considered under the block exemption regulation for vertical agreements. In IP Draughts’ view, the EC is having second thoughts about the inclusion of software licensing within the 2004 TTBER.  Actually, IP Draughts has come to a similar conclusion in recent years, ie that much software supply is closer in concept to a supply of goods than it is to a licensing of technology.

The exclusion of certain software licences is further explained in the new Guidelines for Technology Transfer Agreements:

(62) The licensing of software copyright for the purpose of mere reproduction and distribution of the protected work, that is to say, the production of copies for resale, is not considered to be “production” within the meaning of the TTBER and thus is
not covered by the TTBER and these guidelines. Such reproduction for distribution is instead covered by analogy by Commission Regulation (EU) No 330/201042 and the Guidelines on Vertical Restraints. Reproduction for distribution exists where a licence is granted to reproduce the software on a carrier, regardless of the technical means by which the software is distributed. For instance, the TTBER and these guidelines do not cover the licensing of software copyright whereby the licensee is provided with a master copy of the software in order to reproduce and sell on the software to end users. Nor do they cover the licensing of software copyright and distribution of software by means of “shrink wrap” licences, that is, a set of conditions included in the package of the hard copy which the end user is deemed to have accepted by opening the wrapping of the package, or the licensing of software copyright and distribution of software by means of online downloading.
(63) However, where the licensed software is incorporated by the licensee in the contract product this is not considered as mere reproduction but production. For instance, the TTBER and these guidelines cover the licensing of software copyright where the licensee has the right to reproduce the software by incorporating it into a device with which the software interacts.

IP Draughts is also pleased to see some improvements in the drafting of the final 2014 TTBER, compared with the first draft, including some which address points that the Law Society made on the definitions of what are now “technology rights” and “technology transfer agreement”.

norrisOverall, IP Draughts has the sense that the EC’s Competition Directorate continues to have a deep distrust of IP rights, and of commercial parties and their lawyers who argue for a more liberal competition law regime for IP licensing. However, at the margins, and in relation to drafting issues, he feels the EC has listened to the comments of the Law Society and others, and has made intelligent revisions to the text of the TTBER (which was not always the case when previous TTBERs were drafted).

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How do you solve a problem like… taxation of IP?

Oh dear, I've forgotten what the Austria:UK double taxation treaty says!

Oh dear, I’ve forgotten what the Austria:UK double taxation treaty says!

IP transactions can raise complex tax issues on which specialist advice should be sought.  But the transactional IP lawyer needs to have at least a basic understanding of tax issues, so that he or she can recognise tax issues, instruct specialists where necessary, and (particularly where the transaction does not justify the close involvement of a tax specialist in negotiations) draft and negotiate wording to deal with tax issues in IP agreements.

IP Draughts was recently involved in seeking tax advice in relation to the structuring of agreements with a Gibraltar company.  The client, a privately-owned technology company, was being prudent to ensure that no significant tax risks or tax-saving opportunities arose from the transaction.  The clients and IP Draughts were pleasantly surprised at how down-to-earth and user-friendly tax counsel was.  The advice given was practical and authoritative.  Behind the scenes, IP Draughts and his colleagues had worked hard to find the right tax barrister who was sufficiently experienced, understood both UK and Gibraltar tax, was used to helping individuals and SMEs, did not cost a fortune, and had time available to help us.  It came down to two or three names at the London Bar.

The main tax issues that usually arise in IP licence agreements are the following:

  1. Withholding tax. Must the licensee deduct income/corporation tax from the amount of payments due under the agreement, and pay only the net amount to the licensor, paying the remainder to the tax authorities in the licensee’s jurisdiction?  Most countries have rules on the withholding of tax at source on royalties and other IP payments.  This tax is commonly known as withholding tax.  The tax is being levied on the licensor, and the licensee is acting as a tax collection agent.   It may be possible to get permission from the tax authority to pay the royalties without deduction of tax, if a double-taxation treaty is in existence between the country of the licensee and the country of the licensor.  Typically, the licensor produces evidence from its tax authority that it is a tax payer in the licensor’s country, and this evidence is provided by the licensee to the tax authority in its country.
  2. Drafting for withholding tax. Licence agreements typically say one of two things: (a) the licensee can deduct withholding tax but must cooperate with the licensor to seek an exemption from the licensee’s tax authority, or (b) the licensee must “gross up” the royalty payment so that the amount is as stated in the agreement.  In the latter case, the licensee may also have to make a withholding tax payment, so the licensee is taking the risk of tax being levied on the licensor.
  3. Once we get into Switzerland, we will be free from the VAT regime

    Once we get into Switzerland, we will be free from the VAT regime!

    Value Added Tax. In principle, payments under IP licence agreements are subject to VAT, as payments for “intellectual services”.  The VAT regime applies across the EU.  VAT law is complex, but in summary: (a) invoices from a UK licensor to a UK licensee are likely to include a demand for VAT on the payment, (b) invoices from a UK licensor to a licensee in another EU country are likely not to include VAT – VAT is accounted for by the licensee to its local VAT authority under a complex “reverse charge” procedure but VAT is not paid to the licensor, and (c) invoices from a UK licensor to a non-EU licensee are likely not to be subject to VAT at all, as they are outside the scope of VAT.  However, special rules may apply, eg payments arising from litigation may be treated differently.

  4. Drafting for VAT. Unless otherwise stated in the agreement, any payments stated in the agreement are exclusive of VAT.  If the licensee is obliged to pay VAT to the licensor, it will do so by paying an additional amount, on top of the stated amount, if presented with a valid VAT invoice.  Typically business-to-business agreements within the EU state that payments are exclusive of VAT.  Typically, neither party ends up with a VAT liability as at the end of each VAT accounting period it will simply subtract the VAT paid to suppliers from the VAT charged to customers and pay the net amount to the VAT authorities.  Usually, it is only the end consumer who pays VAT but cannot recover it in his tax accounts.  US parties to licensing transactions sometimes object to clauses that state that payments are exclusive of VAT, as they equate VAT with sales tax.  In fact the regimes are very different.
Patent Box?

Patent Box?

These are not the only tax issues that can arise, but they are the most common.  In some countries, stamp duty may need to be considered.  The UK abolished stamp duty on future transactions over a decade ago.  In some cases, other taxes may need to be addressed in contracts, eg whether a party has sufficient rights to qualify for the “patent box” or for R&D tax credits.  However, these are specialist areas and have not yet generated any standard contract clauses – unless you know differently?

IP Draughts invites readers to share any standard tax-related wording that they have seen or used in IP agreements.


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Dreadful drafting of grant clause

cainIP Draughts and his colleagues have some standard training materials that they use for teaching the principles of contract drafting.  These materials include a slide that consists of a badly-drafted licence clause, on which they invite comments from the audience.  For example, IP Draughts will be using a version of the following slide when he presents some sessions at the forthcoming PraxisUnico Advanced Licensing course, to be held at the University of Loughborough in a couple of weeks’ time.

grant clause

Points for discussion in the above slide include:

  • “grants and conveys” – why?
  • “sole and exclusive” – why?
  • licence under which IP? Does this need to be stated?
  • list of permitted acts – appropriate?
  • have made + have supplied = sublicensing by the back door?
  • use of names Licensor and Licensee
  • other points that may need to be included somewhere in agreement, eg whether sub-licensing is allowed

Imagine our surprise last week, when we were sent a draft contract to review that included the following clause (text shortened and slightly edited below to make it manageable, but typos from original left in).  It seems to be life imitating art!

Licensor hereby grants and coveys unto Licensee a sole and exclusive license in [Territory] and non-exclusive license throughout the world except to [Territory], unrestricted, irrevocable, world-wide, unlimited, royalty free, fully paid up, assignable, transferable, enterprise wide, perpetual, right and license, with the right to sub-license as provided below, to Use the Software and Documentation for its current and future business operations.

IP Draughts is tempted to scrap his made-up text, and use only bona fide contract language that has been in real agreements, in future.


Filed under Contract drafting, Licensing

International patent licensing rankings for 2013

top sixAlthough no official announcement has been made, the 2013 edition of IAM Patent 1000 is now available online.  This international guide to patent lawyers is one of the very few whose rankings coincide fairly closely with IP Draughts’ impressions of the market leaders in this field; all credit is due to the researchers.

This year, two of the contributors to this blog feature in the UK rankings: Mark Anderson and Stephen Brett.  It is a double celebration for Stephen, who recently married and is about to come back from honeymoon.  Mark makes it into the “highly recommended” top tier category for IP licensing, one of only 6 UK lawyers to do so.

IAM’s encomium for Anderson Law LLP reads as follows:

A slew of satisfied clients enthuse about the “considered and prompt approach” of this small but perfectly formed group. It provides an “excellent service that considers legal and commercial implications – it competes with the big boys in terms of quality, but is frequently able to undercut them on price”. Mandates are received from both the business and research communities, with licence agreements, consultancy contracts and revenue-sharing contracts its bread and butter. The group’s illustrious founder Mark Anderson is “technically brilliant”; his exhaustive knowledge of IP licensing was recently recognised by the EPO, which commissioned him to prepare training materials on the subject. Fellow expert Stephen Brett concentrates his busy practice on commercialisation issues for universities and the NHS.

slewThank you very much to all the clients who provided these references.  They are very gratifying.  Now we have to live up to them – we will do our best to do so!

While on the subject of legal rankings, we should not overlook IAM’s companion guide to trade mark practitioners, WTR 1000.  Anderson Law’s consultant, Isabel Davies, features in the latest edition of this guide, with the following write-up:

“Grand name” Isabel Davies … “Incredibly experienced, dedicated and determined”, she enjoys significant prestige on the market.

Congratulations are also due to IP Draughts’ friends and colleagues who are volunteer speakers on the UCL course, IP Transactions: Law and Practice, who feature in these rankings, including:

Mark Lubbock of Ashursts

Ashley Roughton of Counsel

Chris Shelley of Manches

Sally Shorthose of Bird & Bird

Matthew Warren of Bristows



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